HMNF HMN Financial Inc

Fourth Quarter Highlights

HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $712 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.4 million for the fourth quarter of 2018, an increase of $2.0 million compared to net income of $0.4 million for the fourth quarter of 2017. Diluted earnings per share for the fourth quarter of 2018 was $0.51, an increase of $0.43 from the diluted earnings per share of $0.08 for the fourth quarter of 2017. The increase in net income for the fourth quarter of 2018 is due primarily to a $1.0 million decrease in income tax expense, a $0.8 million increase in net interest income, and a $0.3 million decrease in the provision for loan losses between the periods. The decrease in income tax expense is primarily because of the enactment of the Tax Cuts and Jobs Act on December 22, 2017 which required the Company to record $1.1 million in additional income tax expense in the fourth quarter of 2017 and reduced the Company’s federal income tax rate in 2018. Net interest income increased primarily because of the higher interest amounts earned on loans and cash balances as a result of the 100 basis point increase in the federal funds rate between the periods. The provision for loan losses decreased primarily because of the improved credit quality of the loan portfolio and the payoff of certain non-performing commercial loans which resulted in a decrease in the loan loss reserves required between the periods.

President’s Statement“We are pleased to report the improved financial results for both the fourth quarter and the year and the continued improvement in the credit quality of our loan portfolio,” said Bradley Krehbiel, President and Chief Executive Officer of HMN. “While the lower federal tax rate had a positive impact on our earnings, we continue to focus our efforts on increasing net interest income through the origination of appropriately underwritten loans that are funded with core deposits. We believe that our continued focus on these areas along with the prudent management of non-interest expenses will result in improved financial results over the long term.” 

Fourth Quarter Results

Net Interest IncomeNet interest income was $7.1 million for the fourth quarter of 2018, an increase of $0.8 million from the fourth quarter of 2017. Interest income was $7.8 million for the fourth quarter of 2018, an increase of $1.0 million, or 15.2%, from $6.8 million for the same period in 2017. Interest income increased primarily because of higher interest amounts earned on loans and cash balances as a result of the 100 basis point increase in the federal funds rate between the periods and an $8.4 million increase in the average interest-earning assets held between the periods. Interest income also increased $0.5 million because of a change in the amount of yield enhancements recognized on non-accruing loans between the periods. The average yield earned on interest-earning assets was 4.43% for the fourth quarter of 2018, an increase of 54 basis points from 3.89% for the fourth quarter of 2017. The average yield earned on the average interest-earning assets increased 29 basis points as a result of the change in yield adjustments recognized between the periods.

Interest expense was $0.7 million for the fourth quarter of 2018, an increase of $0.3 million, or 49.4%, from $0.4 million for the fourth quarter of 2017. The average interest rate paid on non-interest and interest-bearing liabilities was 0.41% for the fourth quarter of 2018, an increase of 14 basis points from the fourth quarter of 2017. The increase in the interest paid on non-interest and interest-bearing liabilities was primarily because of the 100 basis point increase in the federal funds rate between the periods which increased the cost of deposits and an $8.0 million increase in the average non-interest and interest-bearing liabilities held between the periods. Net interest margin (net interest income divided by average interest-earning assets) for the fourth quarter of 2018 was 4.06%, an increase of 42 basis points, compared to 3.64% for the fourth quarter of 2017. The increase in the net interest margin is primarily related to the increase in interest income as a result of the change in yield enhancements recognized between the periods.

A summary of the Company’s net interest margin for the three month periods ended December 31, 2018 and 2017 is as follows:

		For the three-month period ended
		December 31, 2018							December 31, 2017
(Dollars in thousands)		AverageOutstandingBalance		InterestEarned/Paid		Yield/Rate			AverageOutstandingBalance		InterestEarned/Paid		Yield/Rate
Interest-earning assets:
Securities available for sale	$	79,204		345		1.72	%	$	76,154		310		1.62	%
Loans held for sale		1,840		27		5.70			2,030		25		4.89
Mortgage loans, net		116,341		1,212		4.13			114,808		1,182		4.08
Commercial loans, net		397,617		5,130		5.12			393,823		4,257		4.29
Consumer loans, net		73,665		941		5.07			73,964		913		4.90
Other		29,393		142		1.92			28,863		80		1.10
Total interest-earning assets	$	698,060		7,797		4.43		$	689,642		6,767		3.89
Interest-bearing liabilities:
NOW accounts	$	84,620		21		0.10		$	86,327		11		0.05
Savings accounts		76,309		15		0.08			75,335		15		0.08
Money market accounts		202,325		255		0.50			192,399		171		0.35
Certificates		113,740		359		1.25			110,884		238		0.85
Total interest-bearing liabilities	$	476,994						$	464,945
Non-interest checking		157,838							162,275
Other non-interest bearing deposits		1,435							1,037
Total interest-bearing liabilities and non-interest bearing deposits	$	636,267		650		0.41		$	628,257		435		0.27
Net interest income				7,147							6,332
Net interest rate spread						4.02	%						3.62	%
Net interest margin						4.06	%						3.64	%

Provision for Loan LossesThe provision for loan losses was ($0.2) million for the fourth quarter of 2018, a decrease of $0.3 million compared to $0.1 million for the fourth quarter of 2017. The provision for loan losses decreased between the periods primarily because of the improved credit quality of the loan portfolio and the payoff of certain non-performing commercial loans which resulted in a decrease in the reserves required between the periods. Total non-performing assets were $3.1 million at December 31, 2018, a decrease of $2.8 million from September 30, 2018. Non-performing loans decreased $2.8 million and foreclosed and repossessed assets did not change during the fourth quarter of 2018. The decrease in non-performing loans is primarily because a $2.2 million non-performing commercial real estate loan was paid off during the fourth quarter of 2018. 

A reconciliation of the allowance for loan losses for the fourth quarters of 2018 and 2017 is summarized as follows:

(Dollars in thousands)		2018			2017
Balance at September 30,	$	8,832		$	9,277
Provision		(167	)		59
Charge offs:
Commercial		0			(10	)
Commercial real estate		0			(50	)
Consumer		(85	)		(25	)
Recoveries		106			60
Balance at December 31,	$	8,686		$	9,311
Allocated to:
General allowance	$	7,892		$	8,238
Specific allowance		794			1,073
	$	8,686		$	9,311

The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the two most recently completed quarters and December 31, 2017.

		December 31,			September 30,			December 31,
(Dollars in thousands)		2018			2018			2017
Non‑Performing Loans:
Single family	$	730		$	1,073		$	949
Commercial real estate		1,311			3,689			1,364
Consumer		489			526			553
Commercial		148			197			278
Total		2,678			5,485			3,144
Foreclosed and Repossessed Assets:
Commercial real estate		414			414			627
Total non‑performing assets	$	3,092		$	5,899		$	3,771
Total as a percentage of total assets		0.43	%		0.80	%		0.52	%
Total non‑performing loans	$	2,678		$	5,485		$	3,144
Total as a percentage of total loans receivable, net		0.46	%		0.94	%		0.54	%
Allowance for loan losses to non-performing loans		324.27	%		161.02	%		296.11	%
Delinquency Data:
Delinquencies (1)
30+ days	$	1,453		$	1,298		$	1,789
90+ days		0			0			0
Delinquencies as a percentage of
loan portfolio (1)
30+ days		0.24	%		0.22	%		0.30	%
90+ days		0.00	%		0.00	%		0.00	%

(1) Excludes non-accrual loans.

Non-Interest Income and Expense

Non-interest income was $1.9 million for the fourth quarter of 2018, a decrease of $0.1 million, or 0.6%, from $2.0 million for the same period of 2017. The decrease in non-interest income is primarily related to the $0.1 million decrease in the gain on sales of loans due to a decrease in single family loan sales between the periods. Fees and service charges increased $0.1 million between the periods due primarily to an increase in late payment fees on commercial loans. Other non-interest income increased slightly because of an increase in the sales of uninsured investment products between the periods. Loan servicing fees increased slightly between the periods due to an increase in the single family loans being serviced.

Non-interest expense was $6.3 million for the fourth quarter of 2018, an increase of $0.1 million, or 1.56%, from $6.2 million for the fourth quarter of 2017. Occupancy and equipment expense increased $0.1 million because of an increase in the purchases of non-capitalized software between the periods. Data processing costs increased slightly because of an increase in the mobile and on-line banking costs between the periods. Compensation expense increased slightly between the periods due primarily to an increase in incentives earned. These increases in non-interest expense were partially offset by slight decrease in professional services expense between the periods primarily because of a decrease in legal expenses. Other non-interest expense decreased slightly primarily because of a decrease in deposit insurance expense as a result of a reduction in the rate charged between the periods.

Income tax expense was $0.6 million for the fourth quarter of 2018, a decrease of $1.0 million from $1.6 million for the fourth quarter of 2017. The decrease in income tax expense is primarily because of the enactment of the Tax Cuts and Jobs Act on December 22, 2017 which required the Company to record $1.1 million in additional income tax expense in the fourth quarter of 2017 and reduced the Company’s federal income tax rate in 2018.

Return on Assets and EquityReturn on average assets (annualized) for the fourth quarter of 2018 was 1.29%, compared to 0.21% for the fourth quarter of 2017. Return on average equity (annualized) was 11.24% for the fourth quarter of 2018, compared to 1.88% for the same period of 2017. Book value per share at December 31, 2018 was $17.19, compared to $17.97 at December 31, 2017.

Annual Results

Net IncomeNet income was $8.2 million for 2018, an increase of $3.8 million, or 87.0%, compared to net income of $4.4 million for 2017. Diluted earnings per share for the year ended December 31, 2018 was $1.72, an increase of $0.82 per share compared to diluted earnings per share of $0.90 for the year ended December 31, 2017. The increase in net income for 2018 is due primarily to a $2.2 million increase in net interest income and a $1.5 million decrease in income tax expense between the periods. Net interest income increased primarily because of the higher interest amounts earned on loans and cash balances as a result of the 100 basis point increase in the federal funds rate between the periods. The decrease in income tax expense is primarily because of the enactment of the Tax Cuts and Jobs Act on December 22, 2017 which required the Company to record $1.1 million in additional income tax expense in the fourth quarter of 2017 and reduced the Company’s federal income tax rate in 2018. 

Net Interest IncomeNet interest income was $28.1 million for 2018, an increase of $2.2 million, or 8.8%, from $25.9 million for the same period of 2017. Interest income was $30.4 million for 2018, an increase of $2.7 million, or 9.8%, from $27.7 million for the same period of 2017. Interest income increased primarily because of the higher interest amounts earned on loans and cash balances as a result of the 100 basis point increase in the federal funds rate between the periods and a $27.9 million increase in the average interest-earning assets held between the periods. Interest income also increased $0.5 million because of a change in the amount of yield enhancements recognized on non-accruing loans between the periods. The average yield earned on interest-earning assets was 4.35% for 2018, an increase of 22 basis points from 4.13% for 2017. The average yield earned on interest-earning assets increased 8 basis points as a result of the change in yield adjustments recognized between the periods.

Interest expense was $2.2 million for 2018, an increase of $0.4 million, or 24.3%, from $1.8 million for 2017. The average interest rate paid on non-interest and interest-bearing liabilities was 0.35% for 2018, an increase of 6 basis points from 0.29% paid in 2017. The increase in the interest paid on non-interest and interest-bearing liabilities was primarily because of the 100 basis point increase in the federal funds rate which increased the cost of deposits between the periods and a $22.5 million increase in the average non-interest and interest-bearing liabilities held between the periods. Net interest margin (net interest income divided by average interest-earning assets) for 2018 was 4.03%, an increase of 17 basis points, compared to 3.86% for 2017. The increase in the net interest margin is primarily related to the increase in interest income which is primarily related to the increase in the average yields earned on the average interest-earning assets held between the periods. 

A summary of the Company’s net interest margin for 2018 and 2017 is as follows:

		For the twelve-month period ended
		December 31, 2018							December 31, 2017
(Dollars in thousands)		AverageOutstandingBalance		InterestEarned/Paid		Yield/Rate			AverageOutstandingBalance		InterestEarned/Paid		Yield/Rate
Interest-earning assets:
Securities available for sale	$	79,377		1,335		1.68	%	$	76,559		1,160		1.52	%
Loans held for sale		1,765		89		5.04			1,905		94		4.93
Mortgage loans, net		113,283		4,624		4.08			113,733		4,592		4.04
Commercial loans, net		400,783		20,206		5.04			386,716		18,142		4.69
Consumer loans, net		72,598		3,616		4.98			73,445		3,540		4.82
Other		30,567		511		1.67			18,088		152		0.84
Total interest-earning assets	$	698,373		30,381		4.35		$	670,446		27,680		4.13
Interest-bearing liabilities:
NOW accounts	$	86,750		62		0.07		$	87,416		77		0.09
Savings accounts		77,630		61		0.08			76,592		63		0.08
Money market accounts		199,202		865		0.43			179,675		560		0.31
Certificates		114,243		1,243		1.09			106,006		770		0.73
Advances and other borrowings		140		2		1.71			6,335		327		5.16
Total interest-bearing liabilities	$	477,965						$	456,024
Non-interest checking		156,482							156,149
Other non-interest bearing deposits		1,534							1,279
Total interest-bearing liabilities and non-interest bearing deposits.	$	635,981		2,233		0.35		$	613,452		1,797		0.29
Net interest income				28,148							25,883
Net interest rate spread						4.00	%						3.84	%
Net interest margin						4.03	%						3.86	%

Provision for Loan LossesThe provision for loan losses was ($0.6) million for the year ended December 31, 2018, a decrease of $0.1 million, from ($0.5) million for the year ended December 31, 2017. The provision for loan losses decreased between the periods primarily because of the improved credit quality of the loan portfolio and the payoff of certain non-performing commercial loans which resulted in a decrease in the reserves required between the periods. Total non-performing assets were $3.1 million at December 31, 2018, a decrease of $0.7 million, or 18.0%, from $3.8 million at December 31, 2017. Non-performing loans decreased $0.5 million and foreclosed and repossessed assets decreased $0.2 million between the periods.

A reconciliation of the allowance for loan losses for 2018 and 2017 is summarized as follows:

(in thousands)		2018			2017
Balance beginning of period	$	9,311		$	9,903
Provision		(649	)		(523	)
Charge offs:
Commercial		(270	)		(311	)
Commercial real estate		0			(50	)
Consumer		(226	)		(288	)
Single family mortgage		(24	)		(6	)
Recoveries		544			586
Balance at December 31,	$	8,686		$	9,311

Non-Interest Income and ExpenseNon-interest income was $7.7 million for the year ended December 31, 2018, the same as for the year ended December 31, 2017. Other non-interest income increased $0.1 million primarily because of an increase in the revenue earned on the sale of uninsured investment products between the periods. Loan servicing fees increased $0.1 million between the periods due to an increase in the single family loans being serviced. These increases in non-interest income were entirely offset by a decrease in the gain on sales of loans due to a decrease in single family loan originations and sales between the periods. Fees and service charges decreased slightly between the periods primarily because of a decrease in overdraft fees.

Non-interest expense was $25.4 million for the year ended December 31, 2018, an increase of $0.1 million, or 0.5%, from $25.3 million for the year ended December 31, 2017. Occupancy and equipment expense increased $0.2 million because of increases in depreciation and real estate tax expenses. Data processing costs increased $0.2 million primarily because of an increase in mobile and on-line banking costs between the periods. Other non-interest expense increased $0.2 million between the periods due to an increase in the fraud losses incurred on deposit accounts and an increase in deposit insurance costs due to an increase in insurance rates. These increases in non-interest expense were partially offset by a $0.3 million decrease in compensation and benefits expense primarily because of a decrease in employees between the periods. Professional services expense decreased $0.2 million between the periods primarily because of a decrease in legal expenses.

Income tax expense was $2.9 million for the year ended December 31, 2018, a decrease of $1.5 million, from $4.4 million for the year ended December 31, 2017. The decrease in income tax expense is due primarily to the enactment of the Tax Cuts and Jobs Act on December 22, 2017 which required the Company to record $1.1 million in additional income tax expense in the fourth quarter of 2017 and reduced the Company’s federal income tax rate in 2018. 

Return on Assets and EquityReturn on average assets (annualized) for 2018 was 1.14%, compared to 0.63% for 2017. Return on average equity (annualized) was 9.88% for 2018, compared to 5.52% for 2017. Book value per share at December 31, 2018 was $17.19, compared to $17.97 at December 31, 2017.

General InformationHMN Financial, Inc. and the Bank are headquartered in Rochester, Minnesota. Home Federal Savings Bank operates thirteen full service offices in Minnesota located in Albert Lea, Austin, Eagan, Kasson (2), La Crescent, Owatonna, Rochester (4), Spring Valley and Winona and one full service office in Marshalltown, Iowa. The Bank also operates two loan origination offices located in Sartell, Minnesota and Delafield, Wisconsin.

Safe Harbor Statement This press release may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are often identified by such forward-looking terminology as “expect,” “intend,” “look,” “believe,” “anticipate,” “estimate,” “project,” “seek,” “may,” “will,” “would,” “could,” “should,” “trend,” “target,” and “goal” or similar statements or variations of such terms and include, but are not limited to, those relating to growing our core deposit relationships and loan balances, enhancing the financial performance of our core banking operations, maintaining credit quality, reducing non-performing assets, and generating improved financial results (including profitability); the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements; our expectations for core capital and our strategies and potential strategies for maintenance thereof; improvements in loan production; changes in the size of the Bank’s loan portfolio; the amount of the Bank’s non-performing assets and the appropriateness of the allowance therefor; anticipated future levels of the provision for loan losses; future losses on non-performing assets; the amount and composition of interest-earning assets; the amount of yield enhancements relating to non-accruing and purchased loans; the amount and composition of non-interest and interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends by HMN; the future outlook for the Company; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer of the trust preferred securities held by the Bank; the ability of the Bank to pay dividends to HMN; the ability to remain well capitalized; the impact of new accounting pronouncements; and compliance by the Bank with regulatory standards generally (including the Bank’s status as “well-capitalized”) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject, specifically, and possible responses of the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), the Bank, and the Company to any failure to comply with any such regulatory standard, directive or requirement.

A number of factors could cause actual results to differ materially from the Company’s assumptions and expectations. These include but are not limited to the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation and enforcement; possible legislative and regulatory changes, including changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the OCC and FRB in the event of our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios; changes in costs associated with traditional and alternate funding sources, including changes in collateral advance rates and policies of the Federal Home Loan Bank (FHLB); technological, computer-related or operational difficulties; results of litigation; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company and the Bank; the availability of internal and, as required, external sources of funding; our ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Company’s assumptions and expectations include those set forth in the Company’s most recent filing on Forms 10-K and 10-Q with the Securities and Exchange Commission. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. For additional discussion of the risks and uncertainties applicable to the Company, see the “Risk Factors” sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and Part II, Item 1A of its subsequently filed quarterly reports on Form 10-Q.

All statements in this press release, including forward-looking statements, speak only as of the date they are made, and we undertake no duty to update any of the forward-looking statements after the date of this press release.

 (Three pages of selected consolidated financial information are included with this release.)

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
		December 31,			December 31,
(Dollars in thousands)		2018			2017
		(unaudited)
Assets
Cash and cash equivalents	$	20,709			37,564
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $8,159 and $5,148)		8,023			5,068
Other marketable securities
(amortized cost $73,343 and $73,653)		71,957			72,404
		79,980			77,472
Loans held for sale		3,444			1,837
Loans receivable, net		586,688			585,931
Accrued interest receivable		2,356			2,344
Real estate, net		414			627
Federal Home Loan Bank stock, at cost		867			817
Mortgage servicing rights, net		1,855			1,724
Premises and equipment, net		9,635			8,226
Goodwill		802			802
Core deposit intangible		255			355
Prepaid expenses and other assets		2,668			1,314
Deferred tax asset, net		2,642			3,672
Total assets	$	712,315			722,685
Liabilities and Stockholders’ Equity
Deposits	$	623,352			635,601
Accrued interest payable		346			146
Customer escrows		1,448			1,147
Accrued expenses and other liabilities		4,022			4,973
Total liabilities		629,168			641,867
Commitments and contingencies
Stockholders’ equity:
Serial-preferred stock: ($.01 par value)
authorized 500,000 shares; issued shares		0			0
Common stock ($.01 par value):
authorized 16,000,000; issued shares 9,128,662		91			91
Additional paid-in capital		40,090			50,623
Retained earnings, subject to certain restrictions		99,754			91,448
Accumulated other comprehensive loss		(1,096	)		(957	)
Unearned employee stock ownership plan shares		(1,836	)		(2,030	)
Treasury stock, at cost 4,292,838 and 4,631,124 shares		(53,856	)		(58,357	)
Total stockholders’ equity		83,147			80,818
Total liabilities and stockholders’ equity	$	712,315			722,685

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
		Three Months EndedDecember 31,						Year EndedDecember 31,
(Dollars in thousands, except per share data)			2018			2017			2018			2017
			(unaudited)			(unaudited)			(unaudited)
Interest income:
Loans receivable	$		7,310			6,377			28,535			26,368
Securities available for sale:
Mortgage-backed and related			49			28			197			57
Other marketable			296			282			1,138			1,103
Other			142			80			511			152
Total interest income			7,797			6,767			30,381			27,680
Interest expense:
Deposits			650			435			2,231			1,470
Advances and other borrowings			0			0			2			327
Total interest expense			650			435			2,233			1,797
Net interest income			7,147			6,332			28,148			25,883
Provision for loan losses			(167	)		59			(649	)		(523	)
Net interest income after provision for loan losses			7,314			6,273			28,797			26,406
Non-interest income:
Fees and service charges			909			837			3,330			3,354
Loan servicing fees			314			296			1,255			1,202
Gain on sales of loans			483			610			2,095			2,138
Other			242			216			1,034			960
Total non-interest income			1,948			1,959			7,714			7,654
Non-interest expense:
Compensation and benefits			3,652			3,641			14,728			15,007
Occupancy and equipment			1,062			953			4,304			4,068
Data processing			331			311			1,270			1,106
Professional services			264			302			1,137			1,285
Other			997			1,002			3,948			3,788
Total non-interest expense			6,306			6,209			25,387			25,254
Income before income tax expense			2,956			2,023			11,124			8,806
Income tax expense			604			1,636			2,888			4,402
Net income			2,352			387			8,236			4,404
Other comprehensive income (loss), net of tax			601			(494	)		(69	)		(137	)
Comprehensive income (loss) available to common shareholders	$		2,953			(107	)		8,167			4,267
Basic earnings per share	$		0.52			0.09			1.89			1.04
Diluted earnings per share	$		0.51			0.08			1.72			0.90

HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
SELECTED FINANCIAL DATA:		Three Months EndedDecember 31,					Year EndedDecember 31,
(Dollars in thousands, except per share data)		2018		2017			2018				2017
I. OPERATING DATA:
Interest income	$	7,797		6,767			30,381				27,680
Interest expense		650		435			2,233				1,797
Net interest income		7,147		6,332			28,148				25,883
II. AVERAGE BALANCES:
Assets (1)		723,988		716,465			723,514				697,589
Loans receivable, net		587,623		582,595			586,664				573,894
Mortgage-backed and related securities (1)		79,204		76,154			79,377				76,559
Interest-earning assets (1)		698,060		689,642			698,373				670,446
Interest-bearing liabilities		636,267		628,257			635,981				613,452
Equity (1)		83,005		81,936			83,331				79,767
III.  PERFORMANCE RATIOS: (1)
Return on average assets (annualized)		1.29	%	0.21	%		1.14	%			0.63			%
Interest rate spread information:
Average during period		4.02		3.62			4.00				3.84
End of period		4.02		3.97			4.02				3.97
Net interest margin		4.06		3.64			4.03				3.86
Ratio of operating expense to average
total assets (annualized)		3.46		3.44			3.51				3.62
Return on average common equity (annualized)		11.24		1.88			9.88				5.52
Efficiency		69.34		74.88			70.79				75.30
	December 31,			December 31,
	2018			2017
IV. EMPLOYEE DATA:
Number of full time equivalent employees		182		187
V. ASSET QUALITY:
Total non-performing assets	$	3,092		3,771
Non-performing assets to total assets		0.43	%	0.52	%
Non-performing loans to total loans
receivable, net		0.46	%	0.54	%
Allowance for loan losses	$	8,686		9,311
Allowance for loan losses to total assets		1.22	%	1.29	%
Allowance for loan losses to total loans receivable, net		1.48	%	1.59	%
Allowance for loan losses to non-performing loans		324.27		296.11
VI. BOOK VALUE PER COMMON SHARE:
Book value per common share	$	17.19		17.97
		Year Ended		Year Ended
		Dec 31, 2018		Dec 31, 2017
VII.  CAPITAL RATIOS:
Stockholders’ equity to total assets, at end of period		11.67	%	11.18	%
Average stockholders’ equity to average assets (1)		11.52		11.43
Ratio of average interest-earning assets to
average interest-bearing liabilities (1)		109.81		109.29
Home Federal Savings Bank regulatory capital ratios:
Common equity tier 1 capital ratio		13.26		12.45
Tier 1 capital leverage ratio		11.00		10.68
Tier 1 capital ratio		13.26		12.45
Risk-based capital		14.52		13.71

(1) Average balances were calculated based upon amortized cost without the market value impact of ASC 320.

CONTACT:Bradley KrehbielChief Executive Officer, PresidentHMN Financial, Inc. (507) 252-7169